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Amazon Earnings: Will Decelerating Sales Continue?

Here's how the e-commerce juggernaut is coping with slowing revenue growth.

Expectations were high going into Amazon's (NASDAQ:AMZN) fourth-quarter financial report, particularly in the wake of the company's record-breaking holiday sales. Even though the e-commerce leader produced massive revenue gains, investors were initially concerned about the company's slowing growth rate. Those fears have given way to optimism, as Amazon's stock has outpaced the broader market thus far in 2019.

Amazon will once again be making its case to investors. The company is scheduled to report the results of its first quarter after the market close on Thursday, April 25. Let's recap Amazon's fourth-quarter performance and its growing focus on profits to see if it provides any insight into what investors can expect when the company reports earnings.

Image source: Amazon.

Massive sales, slowing growth

For the holiday quarter, Amazon reported revenue of $72 billion, up 20% year over year, or 21% excluding the impact of foreign currency exchange rates. This was at the high end of management's guidance and well ahead of expectations. Net income of $3 billion resulted in earnings per share (EPS) of $6.04, up 61% year over year. The bottom-line results would have been even better but for a one-time tax benefit in the prior-year quarter. Excluding that to provide an apples-to-apples comparison resulted in EPS that increased an even more impressive 184%.

Sales were strong across Amazon's operating segments and the geographic areas in which the company operates during the holiday quarter. Amazon Web Services (AWS), the company's cloud-computing operation, provided the most robust growth, up 45% year over year to $7.43 billion, amounting to 10% of Amazon's total revenue.

A growing focus on profitability

Reports from late last year suggest that Amazon is taking steps to boost its bottom line as its top-line growth slows. The company has been targeting unprofitable items for sale on its website and forcing sellers to change packaging or quantities in order to improve margins. The products in question typically sell for less than $15 and are heavy or bulky -- like snack foods or bottled beverages. To Amazon employees, these are referred to as "CRaP" or "can't realize a profit," because they result in razor-thin or unprofitable margins.

The company is also focusing on its lucrative advertising business as it searches for future revenue growth. Earlier this year, Amazon launched a free, ad-supported streaming channel, FreeDive, via its wholly owned subsidiary IMDb (Internet Movie Database). Now Amazon may be expanding that strategy. The company last week launched a free, ad-supported music service for Alexa-enabled devices, that marks its third foray into music streaming. Advertising is by nature a high-margin business, also helping to boost Amazon's profitability.

These efforts show that even as sales growth slows, Amazon continues to focus on areas that will yield the most positive results for its mammoth business.

What the quarter might hold

For the first quarter, Amazon forecast revenue in a range of $56 billion to $60 billion, which would represent year-over-year growth of 14% at the midpoint of its guidance. The company is also anticipating operating income of between $2.3 billion and $3.3 billion -- a particularly wide range -- representing growth of between 21% and 74% compared to the prior-year quarter.

Wall Street sentiment is squarely in Amazon's camp, and while we don't want to fall into its short-term thinking, it can help provide perspective. Analysts' consensus estimates are calling for revenue of $59.65 billion, up about 17% year over year and near the high end of management's range, and earnings per share of $4.72, up 44%.

Considering that Amazon generated revenue of nearly $233 billion last year, it was inevitable that its sales growth would eventually slow. In light of that fact, Amazon has been focusing on increasing its profitability, and those efforts are bearing fruit. In each of the past four quarters, Amazon has showed marked year-over-year improvement in the profit margins in each of its major operating segments.

Investors should expect that trend to continue when Amazon reports earnings on April 25.

Author

Daniel W. Vena, CPA, CGMA is long-term investor searching for intangibles that provide explosive growth opportunities in his investments. He served on active duty with the US Army and has a Bachelors degree in accounting.
Follow @dannyvena